STATE OF MICHIGAN

FRANK J. KELLEY, ATTORNEY GENERAL

Opinion No. 6133

March 4, 1983

BANKS AND BANKING:

Charges for credit insurance premiums in addition to any finance charges under the most favored lender doctrine

CREDIT UNIONS:

Charges for credit insurance premiums in addition to any finance charges under the most favored lender doctrine

MOTOR VEHICLE SALES FINANCE ACT:

Applicability of benefit and restriction of Motor Vehicle Sales Finance Act applicable to financial institutions

SAVINGS AND LOAN ASSOCIATIONS:

Charges for credit insurance premiums in addition to any finance charges under the most favored lender doctrine

Banks, federally insured savings and loan associations, and federally insured credit unions may adopt the rates provided in the Motor Vehicle Sales Finance Act and compute their rates in the same manner as licensees under that Act.

Credit insurance premiums, in addition to any finance charges, may be received by such financial institutions.

Honorable Richard Fitzpatrick

State Representative

The Capitol

Lansing, Michigan

You have requested my opinion on the following rephrased question:

The 'most favored lender doctrine' was discussed in OAG, 1981-1982, No 5894, p 157 (May 1, 1981). The opinion concluded that on the basis of the Federal Depository Institutions Deregulation and Monetary Control Act of 1980, 94 State 132 et seq (March 31, 1980), 12 USC 226 note, as amended by 94 Stat 164, 12 USC 1831d, all federally insured banks, credit unions and savings and loan associations have been extended the power historically given only to national banks to charge the highest rate permitted by a state to a competitive financial institution. Citing Northway Lanes v Hackley Union National Bank & Trust Co, 464 F2d 855 (CA 6, 1972), OAG, 1981-1982, No 5894, supra, further recognized that the ability to use a competitor's highest authorized interest rate includes authority to charge processing fees or other charges a competitor would be allowed to receive.

In interpreting the 'most favored lender doctrine,' the federal courts have construed the concept to include not only competing banks and savings and loan associations, but also small loan companies, Fisher v First National Bank of Omaha, 548 F2d 255 (CA 8, 1977), and retail sellers insofar as bank credit cards are concerned, Acker v Provident National Bank, 512 F2d 729 (CA 3, 1975).

In Northway Lanes, supra, 464 F2d 855, 862, the United States Sixth Circuit Court of Appeals specifically rejected the argument that the 'most favored lender doctrine' sould be restricted to bank competitors of national banks. The court stated:

The conclusion that the 'most favored lender doctrine' encompasses credit transactions involving sellers of retail goods was explicted in United Missouri Bank of Kansas City, et al v Danforth, 394 F Supp 774, 783 (WD MO, 1975). The court therein recognized that although a credit sale is not a loan, 12 USC Sec. 85, which establishes the 'most favored lender doctrine' for national banks, permits national banks to not only use state set loan rates but also rates established in connection with 'notes, bills of exchange, or other evidences of debt.' Thus, while a time price differential is technicaly not a loan, the federal district court found that it was indisputable that a credit sale involves the incurring of a debt within the meaning of the federal law.

Section 4416 of the Insurance Code of 1956, 1956 PA 218, as amended; MCLA 500.4416; MSA 24.14416, provides that the 'total amount charged to the borrower for interest and for the insurance premium shall not exceed the maximum amount of interest which could be lawfully charged.' This section was construed in OAG, 1981-1982, No 6034, p 540 (January 27, 1982), which concluded:

Since at the time the opinion was issued virtually all financial institutions in Michigan were charging the maximum amount of interest legally permitted, 1956 PA 218, Sec. 4416, supra, effectively prohibited the charging of any premium for credit insurance to a borrower. As a result, several credit insurance companies filed suit in American Annuity Life Insurance Co, et al, v Kelley, et al, Ingham County Circuit Court, No. 82-28860-CZ, to challenge the opinion.

On June 17, 1982, the Ingham County Circuit Court issued an Opinion and Order upholding the constitutionality of 1956 PA 218, Sec. 4416, supra, and similar to the conclusion in OAG, 1981-1982, No 6034, supra, ruled that financial institutions may not exact interest which, when combined with the credit insurance premium, exceeds the lawful usury rate.

The court then passed upon an issue ⁽¹⁾ which was not considered in OAG, 1981-1982, No 6034, supra, namely the distinction between retail sellers and financial institutions on the basis that the former do not exact interest but instead charge a time price differential, citing Silver v International Paper, 35 Mich App 469; 192 NW2d 535 (1971), lv den 386 Mich 764 (1971). The court concluded that 1956 PA 218, Sec. 4416, supra, did not apply to the activities of retail sellers whose transactions are governed by the Motor Vehicle Sales Finance Act, 1950 Ex Sess PA 27, as amended; MCLA 492.101 et seq; MSA 23.628(1) et seq, the Retail Installment Sales Act, 1966 PA 224, as amended; MCLA 445.851 et seq; MSA 19.416(101) et seq, and the Home Improvement Finance Act, 1965 PA 332; MCLA 445.1101 et seq; MSA 19.417(101) et seq.

In interpreting the state's usury laws, the substance of a transaction must prevail over the form employed by the parties. Heberling v Palmer's Mobile Feed Service, Inc, 119 Mich App 150; 326 NW2d 404 (1982). Although a transaction under the Motor Vehicles Sales Finance Act, supra, is a time price sale between the seller of a motor vehicle and a buyer, the economic realities make the transaction substantially identical to that of a loan secured by the buyer from a financial institution for the purpose of purchasing the vehicle. Few retail sellers retain the installment contracts. Instead they assign the paper to financial institutions or a financing subsidiary of an automobile manufacturer. Pursuant to pre-negotiated contracts between the retail seller and the assignee of the installment contracts, the assignee performs credit checks and passes on whether credit will be offered to a particular vehicle purchaser.

The intent of 1956 PA 218, Sec. 4416, supra, was to prohibit a lender from using credit insurance as a means of circumventing the usury limitations applicable in a particular transaction. However, the advantage retail sellers enjoy in financing such products as automobiles by not being subject to 1956 PA 218, Sec. 4416, supra, is precisely the effect Congress sought to prohibit in giving all federally insured lenders 'most favored lender' status. Thus, federally insured lenders must receive the benefits of the statute under the most favored lender doctrine.

It is reiterated that, consistent with OAG, 1981-1982, No 5894, supra, financial institutions employing the Motor Vehicle Sales Finance Act, supra, pursuant to the 'most favored lender doctrine,' must comply with the restrictions on loan terms imposed under that Act, such as the prohibition against acceleration clauses, 1950 Ex Sess PA 27, as amended, supra, Sec. 14b, and the prohibition against charging unauthorized fees, 1950 Ex Sess PA 27, as amended, supra, Sec. 31.

It is my opinion, therefore, that banks, federally insured savings and loan associations, and federally insured credit unions may adopt the rates provided in the Motor Vehicle Sales Finance Act, supra, and compute their rates in the same manner as licensees under that statute. Since such licensees may receive credit insurance premiums in addition to any finance charge, financial institutions may similarly receive such fees notwithstanding the limitations of 1956 PA 218, Sec. 4416, supra.

Frank J. Kelley